Summary of Findings, Suggestions and Conclusion

Transcription

1 Chapter 6 Summary of Findings, Suggestions and Conclusion 6.1 Summary of Findings The following is the summary of findings from the analysis of primary data collected from ninety business enterprises in India having foreign currency exposure. 1. More than half of the revenue generated and more than a quarter of the cost incurred by respondents is denominated in foreign currency. Foreign currency denominated revenue and cost of IT respondents is more than Pharma and Other category respondents. 2. USD distinctly emerges as the most widely used currency for overseas operations of the respondent enterprises followed by Euro. Usage of other currencies like, GBP and JPY is insignificant. Over-dependence on USD for invoicing the foreign trade, backed up by excess revenue in the form of foreign currency as compared to cost, results in increased chances of facing a higher degree of currency exposure. 3. Currency exposure faced by majority of the respondents is on the higher side (either high or very high). IT category respondents are facing a higher degree of exposure as compared to Pharma and Other category respondents. 4. Significant factors considered by the respondents to determine their currency exposure are: Different overseas markets and their currencies, fluctuations in parity value of INR vis-à-vis other currencies, import of raw material and other resources and the competitive status of the firm in the international and domestic markets. 201

2 5. Quarterly assessment of currency exposure is common among all categories of respondent enterprises. A small number of respondents go for weekly assessment of their currency exposure and majority of them are from IT category. 6. Around two third of the respondents assess the impact of fluctuation in the parity value of the currency on their profit margin but, those who assess it, seldom do so. Those who analyse the impact feel each percentage of fluctuation in exchange rate impacts their profits to the extent of 35 basis points. The practice of computation of impact of currency movement on profitability is more among IT category respondents. 7. A sizable number of respondents forecast the currency movement before taking any decision on currency exposure management, but they do so very rarely. Majority of respondents, irrespective of the category they belong to, feel that rarely their forecast comes true. 8. Just one third of respondent enterprises maintain a separate department / team for assessing and managing currency exposure. Existence of this department is more common among IT category respondents as compared to Pharma and Other category respondents. Cost overrun is the most important reason quoted by respondents for not maintaining such department / team. Accurate assessment of the exposure and timely advice on exposure management tools are the benefits derived by the majority of respondents who maintain separate department / team. 9. Little more than one third of the respondents have put in place a detailed policy to guide them in their exposure management practice. Various features of exposure management policy are more or less equally popular among the respondents. A majority of respondents from the IT category feel that they follow an aggressive hedging policy whereas, a majority of their counterparts from the Pharma category possess a conservative hedging policy. This indicates that IT category respondents treat treasury 202

3 as a profit centre whereas, Pharma respondents treat the same as cost centre. 10. Except a small number of respondents from Other category, all the respondents manage their currency exposure with varying frequency. Too low an exposure, insignificant loss occasioned by not hedging and the levelingout of profit and loss are some of the reasons quoted by respondents for not managing the currency exposure. 11. On analysis of various factors considered by the respondents who go for exposure management, it is found that the value of the transaction, current exchange rate between the home currency and invoicing currency, the forecasted exchange rates and the degree of fluctuation in the currency used for overseas operations are the significant factors that are reckoned by the respondents while deciding on managing the currency exposure. 12. Minimizing the foreign exchange losses is the most important objective of the respondents while managing their currency exposure, followed by reducing the volatility of cash flows. Interestingly, there is no difference in the importance attached by different categories of respondents to all the above discussed objectives. 13. Transaction exposure is the most widely and most frequently managed exposure. All those respondents who are involved in managing their currency exposure manage this exposure. A handful of respondents from IT and Pharma category manage translation and economic exposure. 14. Natural hedge is the most widely used internal technique put in place by the respondent enterprises to manage their currency exposure. This technique is followed by export financing and devising a portfolio of foreign currencies. Various other techniques of currency exposure management are very rarely used by the respondents whereas, none of the respondents have used certain internal hedging techniques such as 203

4 changing the product-market combination, relocating manufacturing and changing the input source, as they look near impossible on ground reality. 15. Forward contract is the most widely and most frequently used external technique of managing currency exposure among all categories of respondents. Usage of Options and Swaps is less as compared to forward contract and they are more popular among IT category respondents as compared to rest of the two categories of respondents. Money market hedge and recently introduced currency futures is the least preferred external exposure management instrument among the respondent enterprises. 16. Cost exceeding the expected benefit is the most important reason behind non usage of almost all of the external exposure management tools. Some other reasons such as instrument not offered by the banker and unfamiliarity with the product are also quoted by sizable portion of respondents. Interestingly, insignificant exposure and problem of disclosure do not seems to be significant reason for non usage of external currency exposure management techniques. 17. Looking at the satisfaction level of respondents about various aspects of forward contract which is a widely used derivative instrument in India, cancellation and rebooking emerges as one area where satisfaction level is high. But cost associated with the usage of forward contract is an area where there is dissatisfaction among respondent enterprises. Satisfaction level among IT category respondents is less relating to areas such as tenure of cover and currency of hedging as compared to the remaining two categories of respondents. Similarly, satisfaction level of Other category respondents relating to cost of forward cover is lesser than that of IT and Pharma categories of respondents. 204

5 18. Around two third of respondents have revealed the percentage of their exposure which they manage with external techniques. On an average, about forty percent of the exposure is managed with the external techniques and this number is more in case of IT category respondents as compared to Pharma and Other category respondents. 19. A vast majority of the respondents operate EEFC / other foreign currency account in the process of managing their currency exposure, but most of them use it either occasionally or seldomly. Usage of these accounts is slightly more popular among IT respondents as compared to Pharma and Other category respondents. As compared to Other category, more respondents from IT and Pharma category feel that the above said accounts will help the business enterprises in managing their currency exposure. 20. Majority of respondents from all categories are indifferent about the opinion that full convertibility of Indian rupee helps them in managing their currency exposure better. Those few respondents who feel that full convertibility helps them in the process of currency exposure management, endorse more or less all suggestions put forward by researcher to hasten the full convertibility. 21. Respondent enterprises opine that, regulations relating to reporting (Accounting standards/ Regulations) are the most stringent regulations followed by regulations relating to usage of Derivative products. Other regulations such as tax regulations, regulations relating to maintenance of foreign currency account and regulations relating to international trade are considered by the respondents as moderate. Respondents belonging to IT category term accounting regulations to be more stringent as compared to Pharma and Other category respondents. 205

6 22. On analysis of satisfaction level of respondents on various supportive measures, it is found that satisfaction level is very low relating to certain aspect of supportive measures like, maintaining stable domestic currency, provision of sops to exporters in case of appreciation of domestic currency and providing cheaper and user friendly exposure management devices. With reference to some measures such as creating awareness about the problem of currency exposure, provision of tax and non tax based incentives to business enterprises especially those involved in exports and provision of newer and innovative currency exposure management devices, there is a moderate or slightly below moderate degree of satisfaction. With no aspect of supportive measures, there is a high degree of satisfaction. 23. As far as expectations of the respondent enterprises from the RBI / Government is concerned, the overwhelming majority of respondents expect certain measures such as mandating the bank-financed exporters to hedge, permitting domestic currency invoicing, providing new and innovative exposure management device, ensuring cheaper exposure management and importantly providing timely export sops. Relating to some measures, for example, permitting the business enterprises to go for domestic currency invoicing, making EEFC / other foreign currency account more user friendly and attractive etc, there is a significant difference in the opinion given by different categories of respondents. Apart from measures put forward by the researcher, sizable numbers of respondents have recommended certain measures which need to be initiated by the government to help the business enterprises in managing their currency exposure. Some of the common measures suggested by them are;: compensating the Freight escalation, upward revision of DEPB rates, restoration of Sec 80 HHC and other tax benefits and withdrawal of Customs duty on import of capital goods. 206

7 6.2 Suggestions: 6.2A. Suggestions offered to respondent enterprises: Based on the opinion expressed by the respondent enterprises, the following suggestions are offered to the respondent enterprises. 1. American dollar is the most widely used currency of respondent enterprises for overseas operations. There is a need for reducing the overdependence on USD. This diversification will result in reduction in the currency exposure. Business enterprises can think of using Euro or any other stable currency for their overseas operations. The other option available to exporters is to invoice their overseas business transactions in different currencies rather than only in one currency (for eg Only USD). Thus, they would be able to diversify their currency exposure. Although domestic currency invoicing is impractical in India for obvious reasons, trade and industry bodies need to pressurize the government to facilitate the domestic currency invoicing. Business enterprises can also gradually think of split currency invoicing which may eliminate the currency exposure to some extent. 2. Business enterprises should consider the assessment of currency exposure more seriously. Due consideration should be given to various factors in assessment of currency exposure. Any lapse in this will result in wrong assessment of exposure. Similarly currency exposure assessment should take place on more frequent basis. Daily or at least weekly assessment will help in effective management of currency exposure. Especially when there is volatility in currency market, business enterprises should take up prediction of currency movement which may help them in their decision on currency exposure management. Apart from assessment of exposure and prediction of currency movement, business enterprises should try to estimate the impact of currency movement on their 207

8 profitability. Such estimates help the business enterprises to decide on using a particular exposure management tool only if the expected negative impact of such currency fluctuation is more than the cost associated with exposure management tool. 3. Time has come when business enterprises should have full scale risk management team / departments (At least those business houses who can afford the same). Enterprises need to install and maintain proper risk management systems and departments capable of handling currency exposures. 4. Based on the overall organizational and financial policy, the business enterprises must clearly lay down currency exposure management policy. It should lay down clear guidelines relating to nature of exposure to be managed, type of derivative products to be used, authority of the risk managers in the matter, etc. 5. It is always advisable for the business enterprises to put in place a currency exposure management mechanism after assessing the nature and type of currency risk they are exposed to. While taking decision on managing the currency exposure, due considerations should be given to various internal and external factors. Similarly organizations should have clarity in their currency exposure management objectives. Although it is impractical to manage economic and translation exposure by using derivative instruments, business enterprises should have some internal mechanism to reduce the adverse effect of these exposures. 6. Business enterprises should try to make optimal utilization of internal techniques to manage their currency exposure as they are cost effective and convenient. Techniques like risk sharing agreements, insisting on adjustment clause in the contract, leading and lagging and creating natural hedge are highly effective tools in managing the adverse effects of currency fluctuation. Business enterprises should have the flexibility to go 208

9 back to their suppliers and importers and share their concern about currency movement. Companies need to try and negotiate rates depending upon the fluctuations in the billing currency. If company has a long term partnership with them, this would definitely help them in the times to come while hedging currency risk. Other solutions could be that the business enterprises having revenue in foreign currency should enter into contract with their foreign counterpart and decide the band of fluctuation in the exchange rate that is acceptable to both. If the exchange rate fluctuate adversely beyond the band fixed, the foreign counterpart should compensate the business enterprise. If the exchange rate fluctuates favorably beyond the band fixed, the business enterprise should compensate their foreign counterpart. This would help to maintain the interest of both parties. This method would be able to minimize losses on account of higher volatility in currency movement. Business enterprises should also look at deferring their export receivables to match the movements in the currency. This could mean that booking higher receivables at favorable rupee rates and deferring the same at unfavorable rates. 7. Judicious usage of external exposure management tools such as Options, Swaps and money market hedge not only provides cover against adverse movement of currency but also results in foreign exchange gains. Apart from making use of forward contract, the business enterprises should try to make use of presently available instruments such as Interest Rate Swap, Currency Swap, Coupon Swap, Foreign Currency rupee Option, cross currency options, Interest Rate Cap or Collar (purchases), Forward Rate Agreement (FRA) contract, etc., based upon the nature of their currency exposure. These instruments should be used especially when the currency movement is expected to be more volatile. Recently introduced currency futures can also be used by the enterprises at least to cover the part of their exposure provided, the maturity of their receivables 209

10 or payables matches the expiry date of futures contract. Apart from using derivative tools, business enterprises should make effective utilization of EEFC / other foreign currency account in mitigating their currency exposure. Sometimes these accounts are interest bearing also. 8. Companies having substantial revenue in foreign currency especially IT companies can have contracts with employees, to accommodate foreign currency movements, either up or down, in their salary. The other option is to offer employees a certain percentage of their salary in foreign currency. This could mean entering into contract with employees, which allows pass through of gains and losses on account of foreign currency movements. 9. Business enterprises should take regular suggestions from bankers before taking any decision on currency exposure management. Instead of depending upon only one banker for all foreign exchange related transactions, it is advisable to maintain business relation with more than one banker. As happened in the past, business enterprises should not blindly purchase the exotic derivatives sold by some of the private banks. Before buying any derivative products, if offered by a banker which they do not understand, it is advisable to consult the RBI for expert advice. 6.2B. Suggestions offered to Central government / RBI. Based on the opinion expressed by the respondent enterprises relating to regulatory and supportive measures and based on the analysis of some secondary sources of information, the following suggestions are offered to the Central government / RBI. 1. RBI / commerce and industry ministry with the assistance of trade and industry bodies should conduct awareness programmes to enterprises, especially small and medium, about the currency exposure management. 210

11 Similarly, they should provide information on currency movement forecasting, helping in selecting a proper hedging tool, etc. RBI should instruct the commercial banks to make currency exposure management mandatory, at least those financed by such banks. 2. A single regulator should regulate all derivative products offered to business enterprises while managing their currency exposure. Presently, the authority of two regulators, viz., RBI and SEBI overlaps in certain areas for example, although all OTC derivatives are regulated by RBI, currency futures are regulated by SEBI. This gives rise to a regulatory overlap leading to conflicts since RBI permits derivatives only for the purpose of hedging a risk but not for speculative purposes. But currency futures give scope for speculation. Regulation of all the aspects of currency exposure management by one dedicated regulator addresses these issues. 3. There is a need for separate currency exchange in India which caters to the needs of business enterprises by offering derivative products for hedging purpose only. Presently, Currency futures and Options are traded in equity and commodity exchanges. Setting up of a dedicated currency exchange just catering to hedgers will make the job easier for all stakeholders. 4. Generally PSU banks suggest only forward contracts to its clients, especially to Small and medium enterprises. They do not encourage other derivative instruments as private banks do. RBI should instruct the PSU banks to popularise other derivative products as well. Some of the private sector banks in the recent past sold exotic derivatives to some of its clients without explaining clearly the pros and cons of the same. This has resulted in considerable foreign exchange losses to business enterprises in question. Instead of allowing the violating banks to settle the dispute out of court, private banks should be exemplarily punished. 211

12 5. It is felt that RBI has not been intervening in the market optimally. This is because the RBI does not reveal (like most central banks which are notorious for being cryptic) the goal it seeks to achieve by intervening in the market. Nobody knows at what level the RBI wants the home currency to be against a popular hard currency like the USD. Does the RBI consider only export competitiveness or does it consider only inflation or does it consider both in various proportions? None knows the answer. RBI should actively intervene in the foreign exchange market keeping in mind the interest of both exporters and importers. 6. RBI in consultation with trade and industry bodies should create a fund to help the member business enterprises to overcome the problem of adverse currency movements. Contribution to the said fund may be from the exchange gains of the member enterprises and part from government. 7. In the past when Indian rupee appreciated especially against USD, government has announced various Tax and Non tax Sops (relief package) to the exporters such as Continuation of tax concession to STPI and EOU, extension of DEPB scheme, (increase in rates), concessional pre-shipment and post shipment credit for small and medium exporters, refund of service tax, payment of interest on balance in EEFC account, etc. Considering the amount of loss the exporters have incurred due to rupee appreciation, it was felt that the relief package was no way sufficient. Instead of announcing tax sops as a kneejerk reaction when a problem arises, it is better to put in place a suitable mechanism which is automatically triggered once such problems arise and provides relief to exporters / importers, as the case may be. 8. Experts feel full convertibility of rupee would facilitate further growth and higher investments. Capital account convertibility is considered to be one of the major features of a developed economy. It helps attract foreign 212

13 investment. It offers foreign investors a lot of comfort as they can reconvert local currency into foreign currency anytime they want to and take their money away. At the same time, capital account convertibility makes it easier for domestic companies to tap foreign markets. At the moment, India has current account convertibility. This means one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted. Given the changes that have taken place over the last two decades in India, there is merit in moving towards fuller capital account convertibility within a transparent framework. Government should take necessary steps to gradually move towards full convertibility of the Indian rupee. But while moving towards full convertibility government should adopt a cautious approach, taking into consideration all aspects and the risks involved in opening up the economy by allowing convertibility of the currency. Full convertibility will help the business enterprises in more efficient management of their currency exposure. 9. Presently only transaction exposure can be managed by using derivative products. Some of the companies in the recent past have requested the RBI to allow them to hedge their economic exposure in overseas exchanges. This facility should be allowed by the RBI. 10. The banks should devise hedging products that will enable small businesses to protect themselves from currency exposure as they may not have access to competitive and efficient forex services and moreover as they cannot park their fund in EEFC account. 213

14 6.3. Conclusion: As discussed in introductory part of the thesis, under Indian context, originally, currency exposure was not a problem at all because parity value of Indian rupee was determined by Government of India. It remained fixed for very long period of time. Even when parity value underwent fluctuation, there used to be a continuous depreciation of Indian rupee against major currencies of the world, especially USD. In early nineties, India resorted to Market determined Exchange rate system. Even after this, there was a continuous depreciation in the parity value of Indian rupee. Since 2003 there started a trend of appreciation of Indian rupee against major currencies, especially USD. Exchange rate of Indian rupee against major currencies, especially USD underwent a drastic appreciation in the year 2007 and the trend was reversed in 2008 when there was a drastic depreciation. In this volatility of exchange rate, Indian Business enterprises which are into overseas operations face significant currency exposure. The present empirical study is undertaken with an objective of understanding and evaluating the management of currency exposure as practiced by Indian enterprises of different categories engaged in multinational business. Based on the study of ninety enterprises it can be concluded that the currency exposure faced by respondent enterprises is on higher side. In spite of high degree of exposure, the Indian business enterprises have not taken the problem of currency exposure with the seriousness which it deserves. This is evident as they give little importance to various factors that need to be considered in assessment of currency exposure; they are asymmetrical in reckoning their foreign exchange risk position, they overlook the computation of impact of currency fluctuation on profitability, forecasting of currency movement for assessment and management of currency exposure is ignored, exposure management policy is inexistent and practice of maintaining a separate department / team for accurate assessment and management of currency exposure is rare among respondents. Although substantial majority of respondents manage their currency exposure, they do not take it up with the 214

15 seriousness which it deserves. This is evident as they are inconsiderate about various internal and external factors while taking exposure management decision; they lay greater emphasis on tackling transaction exposure than operating and translation exposure, there is a deficiency in using internal and external technique of managing currency exposure and they manage a small proportion of their exposure. In India, the economic liberalization in the early nineties provided the foundation for the introduction of Foreign exchange derivatives. With the current account convertibility being introduced in 1993, the environment became even more favorable for the introduction of derivative products. Based on the recommendations of the Rangarajan Committee on Balance of Payments, Indian business enterprises were given access to various currency derivative instruments such as foreign exchange forward contracts, foreign currency-rupee swap instruments and currency options both cross currency as well as foreign currency-rupee, etc. Apart from above said OTC instruments, exchange traded Currency futures were also introduced in Apart from the above discussed derivative instruments, government has permitted the use of EEFC account (Exchange Earners Foreign Currency account) which seeks to help business enterprises to manage their currency exposure indirectly by maintaining a balance in this account in terms of foreign currency without converting it into domestic reporting currency. Moreover sometimes interest also accumulates on the balance outstanding in the said accounts in terms of foreign currency. In spite of existence of problem of currency exposure and avenues available to manage the currency exposure, it is not taken up with the seriousness which it deserves. In the present study, although respondents opine that regulations are not stringent in India, as far as currency exposure management is concerned they feel that they are dissatisfied with the support of the government / RBI in tackling the problem of currency exposure. They expect RBI / government to take proactive steps in the areas like, permitting domestic currency invoicing, 215

16 providing new and innovative exposure management device, ensuring cheaper exposure management, and restoration of Sec 80 HHC and other tax benefits and most importantly providing timely export sops. Based on the findings of the study, some of the suggestions were offered to the respondent enterprises. Most of suggestions are related to reducing the over dependence on one currency, taking the problem of currency exposure more seriously and managing it more efficiently. Similarly, some suggestions were offered to RBI /Government which was related to creating the awareness about the problem, introducing newer and innovative exposure management devices and providing helping hand to business enterprises whenever they are in problem. The techniques available to manage currency exposure provide immediate and short run shield. In the long run, currency exposure can create more grave problems to Indian business enterprises which can only be tackled by resorting to innovation, efficiency and cost reduction. ***** 216